Salaried Professionals - Buy on finance or outright?

This is a discussion on Salaried Professionals - Buy on finance or outright? within Indian Car Loans & Insurance, part of the Team-BHP Reviews category; Outright makes more sense to me.
I bought my car (Jazz 2011) by swiping 3 cards for a total of ...

Outright makes more sense to me.
I bought my car (Jazz 2011) by swiping 3 cards for a total of 4 lacs and remaining 2.5lacs in cash. I converted the debt on my credit cards into EMI's at 0%. Earned reward points and ensured that the payment dues were paid on time. Barring the processing charges (by Citi / StanC and ICICI) on the 3 cards, there was no extra charges on the car price. My dealer too waived of the 2% on card by swiping cards for Rs.25k for 16 days.

The point is, in todays uncertain environment one should avoid debt as much as possible. Incase of a job loss, one risks not only payment of EMI but also a bad CIBIL score. Also, a car is more of a luxury and i guess one should buy only what one can afford in cash. Majority of rational car buyers would buy a car that's not more than 75% of their own CTC. Then whats the point in going for 5 yr - 7 yr loan?

Plus, by making an outright payment you save on the numerous trips to the bank, the stamp, processing, hypothecation fees and paperwork.

This is not always right. In US its complete opposite, the more loan the better credit rating you achieve. My friends even bought their 2000$ car on credit even though they had cash. I think in india also its tied to credit, if you have a good repayment track record future loans will be easier to get.

More over if i have 10 lakhs cash, i am not going to spend 8 lakhs cash for a car, thats a risky and stupid thing to do. your 8 lakh cash will also earn interest if invested properly, so the difference of interest will be only 3 to 4 % more if you take a loan, and more over you will have extra cash in hand. also taking a loan helps you purchase a better variant or next model.

This is not always right. In US its complete opposite, the more loan the better credit rating you achieve..

And we all know what the US economy is going through.

I guess, the decision also depends in what phase of lifecycle one is in.
In my case, I am single and no dependents. So cash, no liabilities fits my bill.
Incase if DINKS, as someone rightly mentioned, the partners contribution also matters.
As the age / phase in life changes, the decision making parameters and priorities will change.

Outright makes more sense to me.
I bought my car (Jazz 2011) by swiping 3 cards for a total of 4 lacs and remaining 2.5lacs in cash. I converted the debt on my credit cards into EMI's at 0%. Earned reward points and ensured that the payment dues were paid on time. Barring the processing charges (by Citi / StanC and ICICI) on the 3 cards, there was no extra charges on the car price. My dealer too waived of the 2% on card by swiping cards for Rs.25k for 16 days.

How much are the processing charges?

Quote:

Originally Posted by krish82

My friends even bought their 2000$ car on credit even though they had cash.

How old was the car that they could get it for 2000$ - asking because in US, it's not easy to get loans for cars which are more than 5-6 years old.

Hi Recompose,
I really dont have an idea how it works, but thats what the sales guy told me. He said that instead of swiping all cards at one go, he'll swipe 25k at once. I guess it creates different transaction ID's.

Loan is a liability. A loan makes sense when the money goes into something that will appreciate in value or a emergency (like medical etc). The opportunity cost of capital cited as an alternative to cash down can also be looked at differently. Especially when you look at volatile times. You need to shell our say 5 L. And you have 5 L. So will you go for say 2 cash down, invest 3 say at max 10% FD. Would you consider this v/s 5 L down and no investment. For 3 L say for 3 years you pay 10,000 EMI. Now if you look at this as an SIP (into the same FD methods, or lets even say RD). Then you pay the 5L down and then you religiously pay the 10,000 L as if you would have paid an EMI. An RD for 3 Years will compounding lead to ~ 10% annual.
The opportunity cost is all not lost. This mode however has some benefits.
1. If there is a bad financial month, you can choose a break from 10,000 investment from the month. You will have less investment, but still you don't have the mandatory commitment of the EMI, and the consequences of missing an EMI
2. If the 3L, would have helped you in an emergency, then you can still take a 3L only if there is an emergency, if you are luck and the 3 years is a smooth sailing you will have the Car, and your money in the bank

From back on the envelope calculation, you will still have the same cash at hand with both EMI and SIP. The only difference is that you might sleep more peacefully as you owe no one! My views only.

In the context of this thread it is assumed that a salaried person has savings of 10L, and the monthly salary takes care of all other commitments, and is looking to buy a car costing 10L. Now if he liquidates his entire savings, and the salary stops then he is in a spot of bother. He cannot run the car nor take care of other commitments.

If a person has a lifetime savings of 10L and he is still looking to buy a car of 10L, he has some habit of living on the edge!

A car cannot be compared to factory equipment. It is not a "means of production" which will give income / sales. It is not an asset, but an expenditure.

Next year I want to buy car worth 10 Lakhs. I do not have that much money in short term investments (Saving account, FD, Liquid funds etc). But I do have much more money in long term target portfolios (Retirement, Child education etc). This money is fully invested Mutual Fund, Stock, Gold ETF and Real Estate.

Now question is, should I disturb this portfolio to make it outright purchase or should I use combination of liquid money I have plus loan? Somone from Finance once said to me that you should not finance long term asset with short term moeny or short term asset with long term money. Though this was said in perspective of company finances, this may apply to an individual also.

There are only two types of investments: Fixed Income and Speculative. All savings accounts, FD, Liquid funds etc fall into Fixed Income category and Mutual Fund, Stock, ULIP, Gold ETF, Real estate fall in Speculative Category.

I believe personal purchases should be made using fixed income savings. If you think it is time to sell some speculative investments, convert them to fixed income and then use it for expenditure, because you can sell fixed income securities when you need, but you can only sell speculative when timing is right, and these two events do not necessarily coincide.

When it comes to financial planning and management, anything beyond the idea of maintaining strict monthly expenditure and savings gives me a terrible migraine

This discussion always leaves me torn between both the worlds. I request the financially knowledgeable Bhpians to be patient with me while I present my understanding so far.

Case 1
For people who do not have x rupees to buy an x rupee car, then do take a loan as long as all the EMIs (I like to consider Home Rent also as part of this, as it is unavoidable too) donít eat up more than 40% of your monthly income.

Case 2
For people who do have all the cash for an outright and full payment, according to my simple calculations, it would be wise to take a loan and also invest the saved cash. Let me explain my understanding using the following example.

This discussion always leaves me torn between both the worlds. I request the financially knowledgeable Bhpians to be patient with me while I present my understanding so far.

I am not really financially knowledgeable, but your question is more of mathematics than finance & hence I will take a shot and also try to be patient.

Quote:

Originally Posted by Miel

Case 2
For people who do have all the cash for an outright and full payment, according to my simple calculations, it would be wise to take a loan and also invest the saved cash. Let me explain my understanding using the following example.

What do I do with the 3 Lakhs left in hand? Invest in 3 tax saving FDs of 1 Lakh each (5 year tenure), at 8.25% rate of interest compounded quarterly.

At the end of 5 years:
What I paid (i.e. loss) to the bank = 4,00,440.00
What I got (i.e. gain) from my FD (Original sum + Compounded interest) = 4,51,279.17
Which means I made a profit of 50,839.17

So you are saying that you borrow 3 Lakhs from the bank and pay them 12% interest on it.

You also loan 3 Lakhs to the bank and they pay you 8.25% interest on it.

But you are still making a profit. If this was actually possible, I would do this every morning and not even buy a car.

Every morning at 8:30 am when the bank opens, I will borrow 3 lakhs from them at 12% interest. I am not planning to buy a car, so I will go back at 9:30 am, I will lend them back 3 Lakhs at 8.25% interest.

And I will make a profit out of it.

And I will make merry for the rest of day (I no longer need to work - so I quit my day job).

Quote:

Originally Posted by Miel

Or am I missing something here? Please advise me.

Yes, you are. 2 or 3 people have put forth this kind of calculations in this thread and I have refuted it - they all were missing one thing. Please look through the thread. If you cannot find the relevant post - I can point it out.

So you are saying that you borrow 3 Lakhs from the bank and pay them 12% interest on it.

You also loan 3 Lakhs to the bank and they pay you 8.25% interest on it.

But you are still making a profit. If this was actually possible, I would do this every morning and not even buy a car.

Every morning at 8:30 am when the bank opens, I will borrow 3 lakhs from them at 12% interest. I am not planning to buy a car, so I will go back at 9:30 am, I will lend them back 3 Lakhs at 8.25% interest.

And I will make a profit out of it.

And I will make merry for the rest of day (I no longer need to work - so I quit my day job).

There is a factor of compounding that i guess you are not taking into account. Taxation of the returns or no taxation of the returns is a different matter altogether, but assuming that the person falls in the 10% bracket still the returns would be similar to what you end up paying to the bank.

The reason for this is pretty simple, the amount invested keeps compounding, whereas the loan taken works on a decreasing balance principle. Hence the difference on the amount you make by investing a certain sum of money for 5 years.

I guess once you take into account these two aspects maybe you would be able to see the point behind our calculations.

I'd request you to give the links provided a shot, they are pretty accurate and would give you clear indicatives.

Moreover, the ROI assumed at 12% is pretty high, current ROI hovers between 10.75 & 11.5% usually and with no real signs of increase in the near future.